California Narrows Workers Who Will Qualify as Independent Contractors for Wage-Hour Purposes
Yesterday, the California Supreme Court issued its decision in Dynamex Operations West, Inc. v. Superior Court (Lee), adopting a very broad view of the workers who will be deemed “employees” as opposed to “independent contractors” for purposes of claims alleging violations of California’s Wage Orders. This is a surprising decision that magnifies the risk of classifying workers as independent contractors in California, and is likely to lead to increased claims (in an already litigious area) challenging such classifications in this state. This is particularly true because the Court’s decision makes it easier for plaintiffs to succeed in getting a class certified in an independent contractor misclassification case.
Dynamex is a delivery company that provides delivery services for retail stores and for consumers. Dynamex historically classified its delivery drivers as employees but then reclassified them as independent contractors because it was more economical. [Note to employers: this is generally a bad idea, particularly where improving the bottom line is the stated purpose for the reclassification.] The drivers basically performed the same work, but were permitted to provide services for other companies and were permitted to hire other workers to assist them. They also had some control over the details of their delivery schedules and routes.
In typical fashion, a driver who worked for Dynamex for a whopping 15 days filed this class action lawsuit (which is now in its 13th year of litigation) alleging various wage and hour violations stemming from the independent contractor classification. Some of the claims alleged violations of the California wage order applicable to transportation industry employees, such as minimum wage, overtime, and meal and rest break violations. Other claims alleged violation of obligations set forth in the Labor Code, but not the wage order (specifically, a claim for failure to reimburse business expenses).
In the course of the litigation, a dispute arose concerning the proper test for determining whether the drivers were employees or independent contractors. The drivers argued that the wage order definition of “employ” (which includes “suffering or permitting to work”) governs. Dynamex argued that the common law, multi-factor test (known in California as the Borello test), which focuses significantly on the level of control the hiring entity has over the worker’s performance of the work (but also considers many other factors), applies. Ultimately, the Court of Appeal held that the broad wage order definition applies to the extent the claims in the case alleged violations of the wage order, but that the common law test applies to claims alleging violations of the Labor Code (rather than the wage order itself). Dynamex petitioned for review by the California Supreme Court, but only as to the ruling that the broad wage order definition applies to claims alleging violations of the wage order. The California Supreme Court granted review on this issue.
The Supreme Court’s Ruling
In an 82-page decision that reads in significant part like new legislation, the Court held that where a worker alleges violations of a California wage order, the wage order’s definition of “employ” must be used to determine whether the worker is an “employee” entitled to the wage order’s protections or an independent contractor who is not entitled to those protections. The wage order at issue, like most of the wage orders, defines “employ” in less than clear terms. The Supreme Court interpreted it as providing three alternative definitions: (1) to exercise control over the wages, hours, or working conditions, OR (2) to suffer or permit to work, OR (3) to engage, thereby creating a common law employment relationship. If any one of these tests is met, the worker is an employee covered by the wage order (and able to sue for a violation of any of the wage order’s provisions).
The Supreme Court further announced a new standard for what it means to “suffer or permit” an individual “to work,” so as to make that worker an “employee” within the meaning of the wage orders. Under this new test, a worker will be PRESUMED to be an employee UNLESS the hiring entity proves ALL of the following: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
With respect to the first prong (A), the Court explained that this means that the hiring entity must not, in fact, exercise control over the performance of the work, nor retain the right to exercise such control by contract. With respect to the second prong (B), the Court explained that the worker must not perform work that is a usual part of the hiring entity’s business. The Court gave the example of a retail store that hires a plumber to fix a leak. Because plumbing work is not part of the usual business carried out by a retail store, a retail store could establish this prong to support a finding of independent contractor status for a plumber. Conversely, in the Dynamex case before the Court, the drivers were performing deliveries – the same type of work regularly carried on by the company, thereby supporting a finding that Dynamex “suffered or permitted” the drivers to work and that they were “employees” within the meaning of the wage order. Thus, for a hiring entity to successfully establish prong B of the new test, it would have to establish that the worker performs work that is outside the usual course of its business. Finally, with respect to prong (C), the Court explained that the hiring entity must show that the worker is actually engaged in an independently established business and cannot do this simply by showing that the worker has the right to do so or is permitted by contract to do so (e.g. a contractor agreement that expressly allows the worker to provide similar services to other entities). The hiring entity also cannot establish this simply on proof that the worker was not “prevented” from operating an independent business. Instead, the hiring entity must demonstrate that the worker made the independent decision to go into business for himself and that there is indicia of such an independent business actually operating (e.g. marketing materials, etc.)
To make things more fun for employers, the state’s high court limited its holding (and its new independent contractor v. employee test) to apply only to claims alleging violations of California’s wage orders. The Court held that it was not deciding whether or not the same test would apply to claims alleging violations of the California Labor Code (e.g. an expense reimbursement claim), or whether, a different test (such as the traditional, multi-factor Borello test) would apply. This issue no doubt will be the subject of further litigation. The possibility that a better test for independent contractor status may apply to non-wage-order-based claims should be of little solace to employers, however, because most lawsuits in California alleging independent contractor misclassification will predominantly allege violations of the applicable wage order.
Classifying workers as independent contractors just got a lot riskier in California. Independent contractor classifications are a lot more likely to be challenged in litigation, and employers will have a much tougher time defeating the claims. It will also be easier for such claims to be successfully pursued on a class basis. If you’ve got a significant number of workers performing services for you in California as independent contractors, now is a good time to re-evaluate those classifications. This also obviously is not a good ruling for those ride-sharing services we all love.